Friday, January 01, 2010

2009 Bull Market: +20% Real Return Ranks #12

The chart above shows annual, inflation-adjusted real returns for the Dow Jones Industrial Average (DJIA) over the last sixty years from 1950 to 2009 (data here and here). Some highlights:

1. The real return on the DJIA for 2009 was 20.62%, ranking #12 for annual returns over the last sixty years.

2. The 2009 return was the highest in five years, and the second highest over the last ten years behind the 23.02% real return in 2003.

3. The DJIA return in 2009 was almost 16% above the average real return over the last sixty years of 4.77%.

What makes the 2009 bull market even more interesting is that it seems to somewhat contradict all of the ongoing reports during 2009 about how we were in the "worst economy since ______" (fill in the blank) and many reports suggested we were almost on the verge of slipping into Great Depression II, etc.

Interestingly, if you do a Google search over the past year in the U.S., you'll find far more results for the term "2009 bear market" (11,800) than for "2009 bull market" (only 355); that's a bear to bull ratio of 33.2 to 1, despite the fact that 2009 obviously now qualifies as a bull market.

Likewise, the Google Trends chart below for the last year shows that the search volume for "bear market" in the United States was higher than the search volume for "bull market."

Bottom Line: The U.S. stock market performed better in 2009 than many people probably realize, and certainly better than most people expected - after all, a real return of more than 20% ranking 12th highest for the last 60 years is pretty good. And since stock markets and stock prices are forward-looking, 2010 might also be a much better year than many people are expecting.

The world is awash in capital. Savings rates are very high in Asia, high in Europe, and vast pools of capital are formed in the US through pension funds, insurance companies, high net worth individuals etc. There are sovereign wealth funds as well.

This means that any bust becomes a buying opp.

It also means passive investing will be a toughie, as there will be so much competition for any investment that promises good returns, but can easily be purchased (stocks etc).

"Pre-herd" investing might be a good take.

For the global economy, I think this means sustained boom. New technologies will R&D'ed and exploited quickly, with information girdling the globe instantly (people send each other technical papers by the web).

More money will be made in Asia in the next 20 years than in the history of the US.

The US? I think our living standards will slowly improve. We are weighted down by debt, and the right-wing and the left-wing are married to more of it, every year.

Huge products for the 2010s are lithium batteries and LEDs.

With the right price signals these two inventions alone could mean steadily declining electricity and fossil fuel demands in the developed world--while we obtain higher living standards and cleaner air.

In all, a terrific decade ahead. In fact, two decades ahead. My crystal ball fogs up after that, and you'll have to go it alone past 2030.

2008 was one of the worst years in the stock market's history. In 2009 the market regained just over half of the 2008 losses. Regaining half the previous years losses does not prove that the economy is strong. The stock market has returned to the level it was at in 1999. The 10-year rate of return is 0%.

Optimistic economic assessments need to be placed in context. Dr. Perry's cheerleading about the economy becomes noise rather than signal because he cherry-picks data and provides overly optimistic spin. For example, he has written multiple times about low inflation being a positive economic sign. In economic circumstances comparable to ours, inflation typically should be worsening. Inflation is held in check today mostly because people are too worried to spend money (which is in excess supply and cheaply available). If the economy picks up enough to alleviate those worries, then inflation will rapidly ensue. Our current lack of inflation is not a positive sign: it is a danger sign. Dr. Perry also is optimistic about unemployment data. But, fewer firings per week is not a positive economic sign, because hirings have lagged far behind firings for two years. Most of the weak businesses have already failed, and the stronger businesses have run out of less essential people to fire. That's why firings per week are down, not because the economy is strong.

another possible interpretation of this chart is that big years for the DJI tend to follow bad years. bounce backs always look good in % terms, but, as dr T rightly points out, we're not even back to levels from the summer of 2008.

i would also point out that the year AFTER a big year tends to be lackluster. last or current year stock prices have very little predictive value. it's why they are weighted so low in trading models.

in this vein - dr perry-

i think your answer to "biased" is both incomplete and essentially meaningless. saying that stock market prices are included in LEI may be factually correct, but to say so and not give even a hint as to why they are and why that would be a good idea (much less explaining the checkered track record of LEI) seems awfully disingenuous.

I'm not an economist, in fact never had a class in economics, so I'm in way over my head here, but here's my take.

I'm thinking somewhere between Mark's rosy projection and the opinion of Sparticus.

We got the "easy gains" last year through cost cutting and margin improvement, but now the market has some heavy lifting to do - 2010's gains will have to be based on revenue growth, not further cost cuts.

Net - I'm thinking a 5-7% increase in the market next year. I think volatility will stay in the system, so it will be a stock picker's and trader's market.

I do not see a large improvement in unemployment next year as companies will continue to attempt to run with minimal employees until they see steady revenue growth for several consecutive quarters. One exception will be temporary employment in the public sector for census personnel.

The weakness of the economy also puts it at risk of being severely affected by things like another terrorist attack or an oil embargo, or break out of another war someplace, or another large number of mortgage foreclosures.

As someone who has a predominately buy and hold strategy using dollar cost averaging, I am still not very happy for two reasons. First, the performance of the entire decade has not been very good. Second, if we take the performance of 2008 and 2009 together, -38.5% and +20.62%, respectively, we get a -25.8% performance over those two years. I still am far from recovering my losses; before even trying to account for inflation.

If you look at a chart of the S&P 500 since 1982, you'll see the spectacular bull market from 1982-00, and two superbubbles, from 1995-00 and from 2002-07.

There was a quick and massive "creative-destruction" process mostly from 2000-02, in a mild recession, and the stock market crash was a "correcting mechanism" to keep future labor supply and demand in equilibrium, because the economy cannot support too many people retiring early.

The commodities boom, e.g. oil, gold, and copper, began around 2000. I suspect, the natural process is a third superbubble, from 2009-14, i.e. more of a production than consumption boom, to correct global imbalances. However, the U.S. government has decided we cannot afford another bubble. It's remarkable that Obama stated bubbles are the "illusion of prosperity" and then implemented policies to reduce another bubble through the illusion of prosperity:

Obama Says U.S. Can’t Afford ‘Bubble-and-Bust’ Cycles

March 12 (Bloomberg) -- President Barack Obama warned a group of chief executive officers that the U.S. can’t continue with “endless cycles of bubble and bust” and must build a new foundation for future economic growth.

The current turmoil can’t be used “as an excuse to keep ignoring the long-term threats to our prosperity” from the rising costs of health care and energy and a faltering education system, Obama said to the group, which is made up of CEOs from U.S. companies including Citigroup Inc., Exxon Mobil Corp. and General Motors Corp.

Obama is campaigning to maintain public support for his economic strategy, which includes new government spending as part of a $787 billion stimulus plan and stabilizing the banking industry and housing, as well as tackling the health-care system, energy and education. He also is defending his plans against critics among congressional Republicans and some Democrats.

‘Fundamental’ to Growth

“I’m not choosing to address these additional challenges just because I feel like it, or because I’m a glutton for punishment,” Obama told the business leaders. “I’m doing so because they are fundamental to our economic growth and to ensuring that we don’t have more crises like this in the future.”

The U.S. has lost 4.4 million jobs since the recession began in December 2007, according to Labor Department figures, and the unemployment rate jumped to 8.1 percent in February, the highest level in more than a quarter century. Meanwhile, household wealth in the U.S. fell by a record $5.1 trillion in the last quarter of 2008 as home values and stock prices plunged, according to the Federal Reserve.

Obama blamed the crisis on “reckless speculation and spending beyond our means; on bad credit and inflated home prices and overleveraged banks.”

‘Illusion of Prosperity’

“Such activity isn’t the creation of lasting wealth,” he said. “It’s the illusion of prosperity, and it hurts us all in the end.”

He likened the initiatives outlined in his $3.55 trillion fiscal 2010 budget plan to projects by past presidents to build a transcontinental railroad, the interstate highway system and the space program.

Such plans aren’t intended to supplant private enterprise, Obama said. Rather, they are designed “to spur commerce and industry,” he said.

Also, I may add, I stated before, a $700 billion tax cut with the $700 billion in TARP, in late 2008, would've resulted in a milder recession and a stronger recovery. Household balance sheets is the weak link. The 2.5% contraction in real GDP in 2009 and 2% future real annual growth are unnecessary.